Operations vs strategy: How CEOs can get the balance right

McKinsey's former global managing partner Dominic Barton talks stakeholders, sustainability and leading for the long-term.

by Stephen Jones
Last Updated: 12 Aug 2019

For all its faults, capitalism is a force for good. No other economic system in history has been more successful in raising people from poverty, driving innovation and creating opportunities for progress. But the 2008 financial crisis and global meltdown that followed were a wake-up call that it might just have lost its way.

As global managing partner of the consultancy giant McKinsey, Dominic Barton was vocal in his criticism of a system that had become too short-term, exclusive in its benefits and sclerotic in the face of change. Despite leaving the hot seat in 2018, he’s still influential in the firm’s work on the future of capitalism.

In a business environment defined by the lingering uncertainty of Brexit, simmering trade tensions, growing discontent over inequality and the urgent need to address climate change, Barton says pursuing a ‘longer’ form of capitalism is more important than ever.

What does long-term capitalism actually mean?

To be an effective capitalist you have to think about your role in society and your licence to operate. The role of the corporation is beyond just improving shareholder value, it’s about asking what it is that you’re doing in the communities you operate within.

That means making sure that businesses are more inclusive when determining the role that they play in society beyond just making money, and that owners aren’t just thinking in the short term but really assessing what they’re trying to build and change.

Is it unrealistic to propose a long-term view in such a rapidly changing and unpredictable market?

The world is moving faster so if you’re only thinking about the long term, you’re not going to be around to see it. You have to have a microscope to one eye and a telescope to the other.

McKinsey conducted research looking at the short-term versus long-term investment strategies of US companies between 2001 and 2014. During the financial crisis, the long-term players actually continued to increase their R&D investments while the short-term companies scaled theirs back.

The short-term companies performed better at the time from a stock market perspective but, if you look at the overall period, the long-term companies outperformed them. So with current geopolitical events you have to be prepared for things going wrong, but I’d also be looking for the opportunities that are going to pop up. It takes guts to do that.

Are you saying that leading for the long term requires a different skillset?

Many leaders operate this way, we just need more of them. While you need to be able to operate day-to-day, deliver value and handle a crisis, one of your biggest roles as a leader is strategic and we don’t talk about that enough.

You should be asking: "How are we going to adapt our organisation over the next five to seven years and yet remain agile?" There’s a lot we can learn from successful family businesses that have lasted more than five generations. But the average lifespan of a CEO is shrinking, so it’s understandable why some take a short-term view.

Shareholders have a major role to play as well though, don’t they?

The biggest driver of behaviour is capital and we’re starting to see some change. BlackRock, for example, has developed its own permanent capital fund and we’re seeing more private equity adopt longer-term ownership models. We need more of that. Having more ownership-based capital gives people courage – it takes quite a brave CEO to make changes when the pressure is short-term. I’ve been in multiple situations when an activist investor comes in and it sparks a crisis. There are some good things that get done, but there’s a real risk of damaging some of the longer-term things.

So what can leaders do to ensure they are leading for the long term?

One is metrics. There’s that age-old adage that what gets measured gets done, so make sure you have at least two sets of measures, one looking short and one looking long. Think about what your health measures are around innovation rate, trust, talent and brand.

The second is think about your shareholder base, particularly the long-term shareholders. If you don’t have them, get them and make sure you actually spend time listening to that constituency.

The third is time. Think about where you spend it individually and with your wider management team. If you’re not spending 25 per cent of your time obsessing about the long-term you’re in trouble. Some bosses spend up to 70 per cent of their time focusing on it – they have very strong leaders underneath them on the operating side. Just make sure that when you’re thinking about your year, your month, week, even your day, you’re allocating enough time to your long-term strategy. It’s easy to get sucked into the tactical and crisis stuff and, frankly, it is more fulfilling because you can tick it off your list. The longer-term stuff isn’t as satisfying but it’s absolutely vital.

Image credit: McKinsey

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